TINA plus S – Curve Effect = M100, a Midcap ETF

After the success of MOSt Shares M50 ETF, the fundamentally managed ETF and the remixed version of Nifty 50 which created record in terms of largest number of ETF investors, Motilal Oswal Asset Management Company Ltd. (MOAMC) has come out with a unique and novel product MOSt Shares M100 ETF having TINA (There Is No Alternative) and S-Curve effect. It is India’s first mid cap ETF based on CNX Midcap Index.

Mid Cap Space – unfilled opportunity for investors

Investors have always been scouting for mid cap space for better returns in comparison to large cap stocks, even at a higher volatility. Many fund houses sensed this opportunity and introduced active mid-cap funds; however, most of them failed to beat their benchmark, categorically CNX Mid Cap over a longer period of time. Moreover, the high expense costs (on an average 2.1 per cent) for these funds have been eating their returns. So, practically, investors have been left with no option but to invest in these funds relatively at higher costs.

MOSt Shares M100 ETF

MOAMC known for its innovations have filled this gap with the launch of MOSt Shares M100 ETF, India’s first mid cap ETF based on CNX Midcap Index. The primary objective of the scheme is to seek investment return that corresponds generally to the performance of the CNX Mid Cap Index, subject to tracking error. 

Why M100 ETF with CNX Mid-Cap Index?

1)     The Fund proposes to keep the expense ratio within 100 bps unlike in active funds which have 2 per cent plus.

2)     In longer investment period say 3 years and 5 years, CNX Mid Cap has outperformed the average midcap fund by a good margin.

3)     The volatility of CNX Mid Cap Index (25.5 per cent) is less than Nifty 50 (26.1 per cent); so, you are getting higher returns even at lower risk.

4)     None of the constituents of CNX Mid Cap has more than 4 per cent exposure in the index; so, they are avoiding concentration risk, an important factor if the market moves uneven.

5)     CNX Mid Cap Index is driven by consumption growth story with majority exposures to HealthCare, FMCG, Auto, Construction etc; so, in long term, the index is going to perform better in comparison to other indices.

6)     Being an ETF, it trades like a share and acts as a fund with no entry and exit loads and portfolio disclosed on daily basis.

TINA and S-Effect

Frankly speaking, the TINA affect applies here – There Is No Alternative to this product in the market. Historically, CNX Mid Cap has bitten its large index counterpart in long year’s category. So, logically, the investors will get exposure in Mid Cap stocks at lesser costs (1 per cent – proposed). Moreover, the S-Curve effect applies to mid-cap stocks – from inception to high growth to maturity i.e. Small Caps -> Mid Caps -> Large Caps. These hidden gems are under-researched, under-owned and under-valued. So, they provide a good growth opportunity in future. 

Word of Caution

1)     Mid cap stocks provide better returns in comparison to large cap companies; however, they have the downside effect too in bear market. However, investors planning to hold for longer years (minimum of 3-5 years) can get good returns over Large Caps.

2)     The proposed expense ratio (up to 1 per cent) is a win-win situation for investors; however, the fund house may go for the maximum permissible expense of 1.5 per cent which can deter the performance. However, it is still below the average expense ratio (over 2 per cent) of active mutual funds.

Should you buy?

First of its kind, the mid cap space has always been dominated by active funds. However, with the availability of this product, the investors fraternity must be excited to get exposures in mid cap stocks at comparatively lesser costs.  Also, the ETF story has started running in India which generally works at lower costs and in the long run, the history says that passive funds work better than an active funds. No doubt ETFs are going to bang in coming years.

M100 rocks!

Happy Investing!

- Amar Ranu